Test bank macro economics 12e global edtion by parkin chapter 09

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Macroeconomics, 12e, Global Edition (Parkin) Chapter The Exchange Rate and the Balance of Payments The Foreign Exchange Market 1) The term "foreign currency" refers to foreign I coins II notes III bank deposits A) II only B) II and III only C) I and II only D) I, II, and III Answer: D Topic: The Foreign Exchange Market Skill: Recognition AACSB: Reflective thinking 2) If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with A) dollars B) yuan, the Chinese currency C) international monetary credits D) euros, or any other third currency Answer: B Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 3) If the United States sells beef to Japan, the U.S beef producer is paid with A) dollars B) yen, the Japanese currency C) international monetary credits D) euros, or any other third currency Answer: A Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 4) When Safeway supermarkets in the United States buys strawberries from Mexico A) it uses dollars to pay Mexican farmers B) it uses pesos to pay Mexican farmers C) it may use any currency it chooses D) the transaction shows up in the U.S capital account Answer: B Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 5) Americans demand Japanese yen in order to A) buy Japanese products B) supply American goods in Japanese markets C) allow the Japanese to buy U.S products D) balance the current account Answer: A Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 6) Which of the following statements is CORRECT? I The exchange rate is a price II The exchange rate is different from other prices because it is NOT determined by supply and demand A) only I B) only II C) I and II D) neither I nor II Answer: A Topic: The Exchange Rate Skill: Conceptual AACSB: Reflective thinking 7) The exchange rate is the A) opportunity cost of pursuing a nation's comparative advantage B) price of one country's currency expressed in terms of another country's currency C) ratio between imports and exports D) interest rate that is charged on risk-free international capital flow Answer: B Topic: The Exchange Rate Skill: Conceptual AACSB: Reflective thinking 8) The exchange rate is the price at which the of one country exchanges for the of another country A) currency; goods B) goods; goods C) currency; currency D) currency; financial instruments Answer: C Topic: The Exchange Rate Skill: Recognition AACSB: Reflective thinking 9) A decrease in the value of a currency in terms of other currencies is known as A) an appreciation B) a depreciation C) a par value D) a gold point Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Recognition AACSB: Reflective thinking 10) When the value of one currency falls relative to another currency, the exchange rate for the first currency has A) depreciated B) appreciated C) demanded D) revalued Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Recognition AACSB: Reflective thinking 11) By definition, currency depreciation occurs when the value of A) all currencies fall relative to gold B) one currency falls relative to another currency C) one currency rises relative to another currency D) gold falls relative to the value of currencies Answer: B Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 12) Suppose that the exchange rate between the dollar and the peso changed from pesos per dollar to pesos per dollar This change means that the A) peso appreciated B) dollar depreciated C) peso depreciated D) Both answers A and B are correct Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 13) If the dollar's value changes from 120 yen per dollar to 110 yen per dollar, the dollar has A) depreciated B) appreciated C) demanded D) devalued Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 14) Which of the following examples definitely illustrates a depreciation of the U.S dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros B) The dollar exchanges for 100 euros and then exchanges for 110 euros C) The dollar exchanges for 275 euros and then exchanges for 250 yen D) The dollar exchanges for 250 yen and then exchanges for 275 euros Answer: A Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 15) When the U.S dollar depreciates against the yen, the yen becomes expensive and the U.S exchange rate A) more; rises B) less; rises C) more; falls D) less; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 16) When the U.S dollar depreciates against the yen, the yen and the exchange rate A) appreciates; rises B) depreciates; rises C) appreciates; falls D) depreciates; falls Answer: C Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 17) Last year the exchange rate between U.S dollars and Mexican pesos was 10 pesos per dollar Today is it 11 pesos per dollar Here, the dollar against the peso, and the peso against the dollar A) appreciated; depreciated B) depreciated; appreciated C) appreciated; appreciated D) depreciated; depreciated Answer: A Topic: The Exchange Rate Skill: Conceptual AACSB: Reflective thinking 18) Suppose the exchange rate of the U.S dollar was 1.50 British pounds = $1.00 (U.S.) on Wednesday, and on the following Monday the exchange rate was $0.75 (U.S.) = 1.00 British pound Which of the following best describes what happened between Wednesday and the following Monday? A) The U.S dollar appreciated against the British pound B) The British pound appreciated against the U.S dollar C) The U.S dollar depreciated against the British pound D) Both answers B and C are correct Answer: D Topic: The Exchange Rate, Currency Depreciation Skill: Conceptual AACSB: Reflective thinking 19) An increase in the value of a domestic currency in terms of other currencies is known as A) an appreciation B) a depreciation C) a flexible exchange rate D) a term not given in the above answers Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Recognition AACSB: Reflective thinking 20) Which of the following examples definitely illustrates an appreciation of the U.S dollar? A) The dollar exchanges for 120 euros and then exchanges for 100 euros B) The dollar exchanges for 100 yen and then exchanges for 125 euros C) The dollar exchanges for pound and then exchanges for 1.2 pounds D) none of the above Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 21) Suppose the exchange rate of the U.S dollar was 1.00 euro = $0.50 on Thursday, and on Friday the exchange rate was $1.00 = 2.10 euros Which of the following best explains what has happened between Thursday and Friday? A) The U.S dollar appreciated against the euro B) The euro appreciated against the U.S dollar C) The U.S dollar depreciated against the euro D) Both answers B and C are correct Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 22) If the pound-dollar exchange rate changes from £0.60 per dollar to £0.65 per dollar, then the pound has against the dollar and the dollar has against the pound A) depreciated; depreciated B) appreciated; depreciated C) appreciated; appreciated D) depreciated; appreciated Answer: D Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 23) If 100 Japanese yen buy more U.S dollars today than yesterday, the dollar has and the yen has A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 24) If the value of a dollar rises in terms of yen, the dollar has and the yen has A) appreciated; appreciated B) appreciated; depreciated C) depreciated; appreciated D) depreciated; depreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 25) If the Japanese yen was 123 per dollar and now it is 114 yen per dollar, it can be said that A) the yen has appreciated against the dollar B) the yen has depreciated against the dollar C) the dollar has appreciated against the yen D) Both answers C and B are correct Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Analytical AACSB: Reflective thinking 26) If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, the dollar has and the yen has A) depreciated; appreciated B) appreciated; depreciated C) depreciated; depreciated D) appreciated; appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 27) Suppose $1 buys 1.20 euros in January and then it buys 1.10 euros in the following December As a result A) the dollar has appreciated B) the euro has appreciated C) the euro has depreciated D) both answers A and C are correct Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking Currency Euro Japanese yen Canadian dollar Nov 2015 exchange rate Nov 2016 exchange rate (per U.S dollar) (per U.S dollar) 0.7466 0.8009 100.2 1.0436 114.61 1.1331 28) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the U.S dollar against the Euro and against the Japanese yen A) depreciated; depreciated B) appreciated; appreciated C) appreciated; depreciated D) depreciated; appreciated Answer: B Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 29) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the Japanese yen against the U.S dollar and the Euro against the U.S dollar A) appreciated; appreciated B) depreciated; appreciated C) depreciated; depreciated D) appreciated; depreciated Answer: C Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 30) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the U.S dollar against the Canadian dollar and the Euro against the U.S dollar A) appreciated, depreciated B) appreciated, appreciated C) depreciated, appreciated D) depreciated, depreciated Answer: A Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual AACSB: Reflective thinking 31) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the Canadian dollar against the U.S dollar and the Japanese yen against the U.S dollar A) depreciated, depreciated B) appreciated, appreciated C) appreciated, depreciated D) depreciated, appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual AACSB: Reflective thinking 32) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the Euro against the U.S dollar, the Japanese yen against the U.S dollar and the Canadian dollar against the U.S dollar A) depreciated, depreciated, depreciated B) appreciated, depreciated, appreciated C) appreciated, appreciated, appreciated D) depreciated, depreciated, appreciated Answer: A Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual AACSB: Reflective thinking 33) The table above shows the exchange rates between various currencies and the U.S dollar Between 2015 and 2016, the Euro against the U.S dollar, the U.S dollar against the Japanese yen and the U.S dollar against the Canadian dollar A) depreciated, appreciated, appreciated B) depreciated, depreciated, appreciated C) appreciated, appreciated, appreciated D) appreciated, depreciated, depreciated Answer: A Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual AACSB: Reflective thinking 34) When people who are holding the money of some other country want to exchange it for U.S dollars, they U.S dollars and that other country's money A) demand; supply B) supply; supply C) supply; demand D) demand; demand Answer: A Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 35) Which of the following creates a demand for U.S dollars? A) Toyota, a Japanese firm, purchasing land in Texas B) a U.S restaurant purchasing Mexican tomatoes C) a U.S tourist catching a show in London D) a Japanese tourist catching a show in London Answer: A Topic: The Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 36) When the exchange rate falls, in the foreign exchange market the A) quantity demanded of the currency increases B) demand for the currency increases C) quantity demanded of the currency decreases D) demand for the currency decreases Answer: A Topic: Law of Demand for Foreign Exchange Skill: Recognition AACSB: Reflective thinking 37) The law of demand in the foreign exchange market refers to the relationship between the A) exchange rate and the quantity of U.S dollars demanded B) interest rate and the exchange rate C) interest rate and the quantity of U.S dollars demanded D) U.S price level and the exchange rate Answer: A Topic: The Law of Demand for Foreign Exchange Skill: Recognition AACSB: Reflective thinking 38) The law of demand for dollars in the foreign exchange market means that the A) lower the exchange rate, the greater the quantity of dollars demanded B) higher the exchange rate, the smaller the quantity of dollars demanded C) lower the exchange rate, the smaller the quantity of U.S exports demanded D) Both answers A and B are correct Answer: D Topic: The Law of Demand for Foreign Exchange Skill: Conceptual AACSB: Reflective thinking 10 29) What is the relationship between net borrower, net lender, debtor nation, and creditor nation? Answer: If a nation is currently borrowing from the world more than it is lending to the world, the nation is a net borrower If a nation is currently lending more to the world more than it is borrowing from the world, the nation is a net lender If during its entire history a nation has borrowed more than it has lent, the nation is a debtor nation If during its entire history a nation has lent more than it has borrowed, the nation is a creditor nation The distinction between borrowing or lending and being a debtor or creditor deals is the distinction between a flow and a stock A nation that is a net borrower is increasing its debt (or decreasing its assets) The net borrowing is the flow that adds to the stock of debt (or decreases the stock of assets) A nation that is a net lender is increasing its assets (or decreasing its debt) The net lending is the flow that adds to the stock of assets (or decreases the stock of debt) Topic: Borrowing and Lending Skill: Conceptual AACSB: Reflective thinking 30) When a nation has no funds to finance economic development, how can it acquire the needed funds? Is the country a net lender or a net borrower? Answer: Funds for development can be borrowed from other nations In this case, the borrowing nation is a net borrower in its capital account Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual AACSB: Reflective thinking 31) "Although the United States is running a large current account deficit, it is still ranked as a major international net lender." Is the previous statement correct or incorrect? Briefly explain your answer Answer: The statement is incorrect Aside from changes in the official settlements account, any nation that is running a current account deficit must be paying for the excess of imports over exports by borrowing from abroad The United States is no exception and with its large current account deficits, the United States is a large net borrower from abroad Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual AACSB: Reflective thinking 32) What is a "debtor nation?" Is the United States a debtor nation? Answer: A debtor nation is a country that during its entire history has borrowed more from the rest of the world than it has lent to it Although the United States was a creditor nation until the 1980s, its borrowing during the 1980s means that today the United States is a debtor nation Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual AACSB: Reflective thinking 124 33) What is the relationship between net exports, the government sector surplus or deficit, and the private sector surplus or deficit? Answer: The relationship is that net exports equals the government surplus or deficit plus the private sector surplus or deficit Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual AACSB: Reflective thinking 34) Saving is S, investment is I, net taxes is NT, government expenditure is G, exports is X, and imports is M Using these symbols, what is the relationship among the saving, investment, net taxes, government expenditure, exports, and imports? Answer: The relationship is that (X - M) = (S - I) + (NT - G), or net exports equals the private sector balance plus the government sector balance Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual AACSB: Analytical thinking 125 Numeric and Graphing Questions 1) In the figure above, illustrate the effect of an increase in the U.S interest rate What is the effect on the exchange rate? Answer: The figure above shows the effect of the increase in the U.S interest rate The demand for dollars increases and the demand curve shifts rightward The supply of dollars decreases and the supply curve shifts leftward The equilibrium exchange rate rises, to 100 yen per dollar in the figure Topic: Changes in the Exchange Rate Skill: Analytical AACSB: Analytical thinking 126 2) The figure above illustrates the U.S foreign exchange market Illustrate how the exchange rate changes if the expected future exchange rate falls Does the dollar appreciate or depreciate? Answer: The fall in the expected future exchange rate decreases the demand for dollars and increases the supply The demand curve shifts leftward and the supply curve shifts rightward As shown in the figure, the exchange rate falls so the dollar depreciates Topic: Changes in the Exchange Rate Skill: Analytical AACSB: Analytical thinking 127 3) If imports are $1,200 billion and exports are $1,300 billion, while net interest income and net transfers are zero, what is the current account balance? Answer: The current account balance equals exports minus imports, or $1,300 billion minus $1,200 billion, which is $100 billion Topic: Balance of Payments Accounts Skill: Analytical AACSB: Analytical thinking 4) During this year a country reports imports of $1,000 billion, exports of $1,100 billion, foreign investment in the country of $900 billion, investment abroad of $1,200 billion, net interest and net transfers of zero What is the country's current account balance? Answer: The current account balance is $100 billion Topic: Balance of Payments Accounts Skill: Analytical AACSB: Analytical thinking 5) If the current account balance is $235 billion and U.S official reserves increased by $35 billion, what is the official settlements account balance and the capital account balance? Answer: The official settlements account equals the negative of the change in official reserves, so the official settlements account balance is -$35 billion Then, the sum of the current account balance plus the capital account balance plus the official settlements account balance equals zero, which means that the capital account balance must equal $200 billion Topic: Balance of Payments Accounts Skill: Analytical AACSB: Analytical thinking 128 Item Imports of goods and services Exports of goods and services Net interest Net transfers Foreign investment in the United States U.S investment abroad Amount (billions of dollars) 1,400 1,600 0 480 700 6) The above gives some of the balance of payments accounts of the United States in 2020 a) What is the current account balance? b) What is the capital account balance? c) What is the official settlements account balance? Answer: a) The current account balance is $200 billion b) The capital account balance is -$220 billion c) The official settlements account balance is $20 billion Topic: Balance of Payments Accounts Skill: Analytical AACSB: Analytical thinking 129 Item Investment Saving Government expenditure Net taxes Amount (billions of dollars) 1,900 1,600 1,000 1,700 7) The table above gives some of the accounts of the United States in 2020 a) What is the private sector balance? b) What is the government sector balance? c) What is net exports? Answer: a) The private sector balance equals saving minus investment, or -$300 billion b) The government sector balance equals net taxes minus government expenditure, or $700 billion c) Net exports equals the sum of the private sector balance plus the government sector balance, so net exports equal $400 billion Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical AACSB: Analytical thinking 8) The United States has net exports of -$350 billion and the private sector balance is -$400 billion What is the government sector balance? Answer: The sum of the private sector balance plus the government sector balance equals net exports Therefore -$350 billion = -$400 billion + government sector balance, so the government sector balance is $50 billion Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical AACSB: Analytical thinking True or False 1) An exchange rate is the price of one country's currency in terms of another country's currency Answer: TRUE Topic: The Exchange Rate Skill: Recognition AACSB: Reflective thinking 2) "Currency appreciation" means the price of the currency is decreasing Answer: FALSE Topic: The Exchange Rate, Currency Appreciation Skill: Recognition AACSB: Reflective thinking 130 3) If the exchange rate rises from 100 yen per dollar to 120 yen per dollar, the dollar has appreciated Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 4) If the exchange rate falls from 120 yen per dollar to 110 yen per dollar, the dollar has depreciated Answer: TRUE Topic: The Exchange Rate, Currency Appreciation Skill: Conceptual AACSB: Reflective thinking 5) If the yen appreciates in value against the dollar, the dollar must have depreciated against the yen Answer: TRUE Topic: The Exchange Rate, Currency Appreciation and Depreciation Skill: Conceptual AACSB: Reflective thinking 6) The demand for one money is the supply of another money Answer: TRUE Topic: The Exchange Rate Skill: Recognition AACSB: Reflective thinking 7) A rise in the exchange rate leads to a decrease in the quantity of dollars demanded Answer: TRUE Topic: Law of Demand for Foreign Exchange Skill: Conceptual AACSB: Reflective thinking 8) The lower the exchange rate, the cheaper are foreign-produced goods and services Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual AACSB: Reflective thinking 9) Other things remaining the same, the higher the current exchange rate, the larger is the expected profit from buying dollars Answer: FALSE Topic: Law of Demand for Foreign Exchange Skill: Conceptual AACSB: Reflective thinking 131 10) In the foreign exchange market, a decrease in the exchange rate increases the quantity of dollars supplied Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Conceptual AACSB: Reflective thinking 11) According to the law of supply in the foreign exchange market, when the U.S exchange rate rises, the quantity of U.S dollars supplied will decrease Answer: FALSE Topic: Law of Supply for Foreign Exchange Skill: Recognition AACSB: Reflective thinking 12) An increase in the U.S interest rate differential increases the demand for dollars Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual AACSB: Reflective thinking 13) If the Fed raises the interest rate, in the foreign exchange market the demand for the U.S dollar increases Answer: TRUE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual AACSB: Reflective thinking 14) If U.S interest rates are rise relative to foreign interest rates, in the foreign exchange market the demand for U.S dollars will decrease Answer: FALSE Topic: Changes in the Demand for Dollars, Interest Rates Skill: Conceptual AACSB: Reflective thinking 15) In the foreign exchange market, a decrease in the supply of dollars leads to an appreciation of the U.S dollar Answer: TRUE Topic: Changes in the Exchange Rate Skill: Conceptual AACSB: Reflective thinking 16) Purchasing power parity means that the expected exchange rate is such that the returns from investing in two nations are equal Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition AACSB: Reflective thinking 132 17) Purchasing power parity means equal rates of return Answer: FALSE Topic: Purchasing Power Parity Skill: Recognition AACSB: Reflective thinking 18) In the short run, a change in the nominal exchange rate brings an equivalent change in the real exchange rate Answer: TRUE Topic: The Real Exchange Rate Skill: Conceptual AACSB: Reflective thinking 19) The exchange rate can be influenced by a nation's central bank Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 20) In the foreign exchange market, if the demand for dollars permanently decreases, the Fed can maintain the exchange rate at its old equilibrium level indefinitely by buying dollars Answer: FALSE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 21) When the demand for a currency permanently increases, that nation's central bank can maintain its fixed exchange rate indefinitely Answer: TRUE Topic: The Fed in the Foreign Exchange Market Skill: Conceptual AACSB: Reflective thinking 22) A country's balance of payment accounts include its government budget deficit or surplus Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition AACSB: Reflective thinking 23) The current account records foreign investment in the United States minus U.S investment abroad Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition AACSB: Reflective thinking 133 24) The official settlements account records the change in official U.S reserves Answer: TRUE Topic: Balance of Payments Accounts Skill: Recognition AACSB: Reflective thinking 25) The sum of the current, capital and official settlements accounts is always zero Answer: TRUE Topic: Balance of Payments Accounts Skill: Conceptual AACSB: Reflective thinking 26) If the official settlements account is zero, whenever the United States has a current account deficit, it must also have a capital account deficit Answer: FALSE Topic: Balance of Payments Accounts Skill: Conceptual AACSB: Reflective thinking 27) Over the past decade, the United States has had a current account deficit and capital account deficit Answer: FALSE Topic: Balance of Payments Accounts Skill: Recognition AACSB: Reflective thinking 28) In the market for international loans, most countries, including the United States, are net borrowers Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition AACSB: Reflective thinking 29) The United States is a creditor nation Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition AACSB: Reflective thinking 30) Currently, the United States is both a net borrower and a debtor nation Answer: TRUE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Recognition AACSB: Reflective thinking 134 31) A net borrower country must also be a debtor nation Answer: FALSE Topic: Borrowers and Lenders, Debtors and Creditors Skill: Conceptual AACSB: Reflective thinking 32) If net exports increases, but neither government expenditure nor net taxes change, saving must increase Answer: TRUE Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Conceptual AACSB: Reflective thinking Extended Problems 1) The price of a computer in the United States is $1,000 The price of a car in Germany is 10,000 euros The current exchange rate is 0.9 euros per dollar a) If a computer is exported from the United States to Germany with no barriers to trade, what will be the price of the computer in Germany? b) If a car is imported to the United States from Germany with no barriers to trade, what will be the price of the car in the United States? c) Suppose the dollar appreciates by 10 percent against the euro How will the price of a computer exported from the United States change in Germany? d) Suppose the dollar appreciates by 10 percent against the euro How will the price of a car imported to the United States from Germany change in the United States? Answer: a) The price of an American computer in Germany is $1,000 × 0.9 euros per dollar, which is 900 euros b) The price of a German car in the United States is 10,000 euros/0.9 euros per dollar = $11,111 c) The new exchange rate is 0.9 euros per dollar × 1.1 = 0.99 euros per dollar So the new price of a U.S computer in Germany is $1,000 × 0.99 euros per dollar = 990 euros The price of a U.S computer in Germany rises by 10 percent d) The new price of a German car in the United States is 10,000 euros/0.99 euros per dollar = $10,101 So the price of a German car in the United States falls by about 10 percent Topic: The Exchange Rate Skill: Analytical AACSB: Analytical thinking 135 2) Suppose that the price of a Big Mac is a good approximation of the price level in the country A Big Mac costs £2 in London and $3 in New York a) If purchasing power parity holds, what is the exchange rate between the U.S dollar and the British pound? b) If the current exchange rate is $1.6 per pound, what is the dollar price of a Big Mac in London? What you predict will happen to the exchange rate? Explain c) The exchange rate between the U.S dollar and the Russian ruble is 30 rubles per dollar If purchasing power parity holds, what is the price of a Big Mac in Moscow? Answer: a) If purchasing power parity holds, the dollar price of a Big Mac in London must be the same as that in New York This is the case when the exchange rate is $1.5 per pound With this exchange rate, the dollar price of a Big Mac in London is £2 × 1.5 dollars per pound = $3 b) If the current exchange rate is $1.6 per pound, the dollar price of a Big Mac in London is £2 × 1.6 dollars per pound, which is $3.20 If the price of a Big Mac represents the price level in the country, British goods are relatively more expensive than American goods The quantity of the U.K imports demanded decreases in the United States and the quantity of U.S exports demanded increases in the United Kingdom The demand for dollars in the foreign exchange market increases and the demand for pounds decreases As a result, the dollar appreciates against the pound until the purchasing-power-parity exchange rate is restored c) If purchasing power parity holds, the dollar price of a Big Mac in Moscow must be the same as in New York, that is, $3 Given the ruble/dollar exchange rate, the price of a Big Mac in Moscow is $3 × 30 rubles per dollar, which is 90 rubles Topic: Purchasing Power Parity Skill: Analytical AACSB: Analytical thinking 136 Item Imports of goods and services Exports of goods and services Foreign investment in Exland Exland's investment abroad Increase in the official holdings of foreign currency Billions of buns 600 700 350 430 20 3) The citizens of Exland, whose currency is the bun, conduct the transactions outlined in the table above a) What is Exland's current account balance? b) What is Exland's capital account balance? c) What is Exland's official settlement balance? d) What is Exland's net foreign borrowing? Answer: a) The current account balance equals exports minus imports: 700 - 600 = 100 billion buns b) The capital account balance equals foreign investment in Exland minus Exland's investment abroad: 350 - 430 = -80 billion buns c) A country's official settlement balance is the change in its official reserves If official reserves increase, the official settlement balance is negative So Exland's official settlement balance is -20 billion buns d) A country's net foreign borrowing is the difference between its borrowing from the rest of the world and its lending to the rest of the world Exland's foreign borrowing is the foreign investment in Exland (350 billion buns) Exland's foreign lending is its investment abroad (430 billion buns) plus the increase in the official holdings of foreign currency (20 billion buns) So Exland's net foreign borrowing is 350 - 430 - 20 = -100 billion buns, which means the country is a net foreign lender Topic: Balance of Payments Accounts Skill: Analytical AACSB: Analytical thinking 137 Item GDP Consumption expenditure Government expenditure on goods and services Investment Exports of goods and services Government budget deficit Billions of bonts 320 200 60 80 40 25 4) The table above shows some data for Wiland, a country whose currency is the bont The official settlement balance, net interest income, and net transfers from abroad are zero a) What is Wiland's imports of goods and services? b) What is Wiland's current account balance? c) What is Wiland's capital account balance? d) What is Wiland's net taxes? e) What is Wiland's private sector balance? Answer: a) The country's net exports are GDP minus consumption minus investment minus government purchases, which is 320 - 200 - 80 - 60 = -20 billion bonts Net exports are the difference between imports and exports Because Wiland's exports are 40 billion bonts and its net exports are -20 billion bonts, then it imports must equal 60 billion bonts b) Because net interest income and net transfers from abroad are zero, the current account balance equals net exports, so the current account balance is -20 billion bonts c) Because the official settlement balance is zero, the sum of the capital account balance and current account balance is zero, which means that the capital account balance is 20 billion bonts d) The government budget deficit is the difference between government purchases and net taxes, which means net taxes equal government purchases minus the budget deficit So in Wiland, net taxes are 60 - 25, which is 35 billion bonts e) The private sector balance is saving minus investment Saving is GDP minus net taxes minus consumption In Wiland, saving is 320 - 35 - 200 = 85 billion bonts So the country's private sector balance is 85 - 80 = billion bonts, that is, a surplus of billion bonts Topic: Net Exports, the Government Budget, Saving, and Investment Skill: Analytical AACSB: Analytical thinking 138 ... worried about the outlook for the global economy Fears were at their greatest in late 2008 and early 2 009 after the collapse of the Lehman Brothers investment bank in September 2008 As investors... worried about the outlook for the global economy Fears were at their greatest in late 2008 and early 2 009 after the collapse of the Lehman Brothers investment bank in September 2008 If investors... Suppose Mitsubishi Bank (a Japanese bank) expects the exchange rate to be 125 yen per U.S dollar at the end of the year If today's exchange rate is 120 yen per U.S dollar, Mitsubishi bank A) buys U.S
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